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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

TNB USA INC.,

Plaintiff,

v.

FEDERAL RESERVE BANK OF NEW YORK,

Defendant.

18 Civ. 7978 (ALC)

OPPOSITION TO DEFENDANT’S

MOTION TO DISMISS

DEWEY PEGNO & KRAMARSKY LLP

777 Third Avenue – 37th Floor

New York, New York 10017

Tel. (212) 943-9000

Fax (212) 943-4325

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TABLE OF CONTENTS

INTRODUCTION ........................................................................................................................1

BACKGROUND ...........................................................................................................................4

A. The Federal Reserve System ................................................................................... 4

B. Depository Institutions Deregulation and Monetary Control Act of 1980 ............. 5

C. The IOER Program ................................................................................................. 6

D. FRBNY’s Existing Narrow Banking Operations .................................................... 8

E. TNB’s Charter and Master Account Application ................................................... 8

F. The Board’s Decision to Interfere in TNB’s Master Account Application .......... 10

G. The Board Begins a Rulemaking Process to Shut Down TNB While TNB’s

Master Account Supposedly Remains “Under Consideration” ............................ 11

ARGUMENT ...............................................................................................................................13

I. TNB HAS A STATUTORY RIGHT TO A MASTER ACCOUNT ........................... 14

A. Section 11A of the Federal Reserve Act Unambiguously Requires FRBNY to

Open a Master Account for TNB .......................................................................... 14

B. Section 13 of the Federal Reserve Act Does Not Permit Federal Reserve Banks to

Withhold Master Accounts or Other Services ...................................................... 17

C. Section 11A’s Mandate Does Not Conflict with the FRA but the Board’s

Unlawful Intervention in FRBNY’s Daily Operations Does ................................ 19

II. THIS COURT HAS SUBJECT MATTER JURISIDICTION ................................... 20

A. TNB’s Claims Are Ripe Because FRBNY Has Refused to Act on TNB’s

Application for a Master Account......................................................................... 21

B. TNB Has Standing to Challenge FRBNY’s Ongoing Refusal to Open a Master

Account Because Each Passing Day Adds to Its Losses ...................................... 22

C. FRBNY Has Identified No Legal Authority or Sound Reason for the Court to

Refuse Jurisdiction Under the Declaratory Judgment Act .................................... 23

III. THE BOARD’S POLICY CONCERNS ARE IRRELEVANT AND BASELESS ... 24

CONCLUSION ...........................................................................................................................25

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TABLE OF AUTHORITIES

Page(s)

Amico v. New Castle Cty.,

553 F. Supp. 738 (D. Del. 1982) ............................................................................................. 21

Comm’n Full Emp’t v. Blumenthal,

606 F.2d 1062 (D.C. Cir. 1979) .............................................................................................. 23

Dow Jones & Co., Inc. v. Harrods Ltd.

346 F.3d 357 (2d Cir. 2003).................................................................................................... 23

Farmers’ & Merchants’ Bank of Monroe, N.C. v. Federal Reserve Bank of Richmond,

262 U.S. 649 (1923) ................................................................................................................ 18

Fourco Glass Co. v. Transmirra Prods. Corp.,

353 U.S. 222 (1957) ................................................................................................................ 19

Fourth Corner Credit Union v. Fed. Reserve Bank Kan. City,

154 F. Supp. 3d 1185 (D. Colo. 2016) .................................................................................... 17

Fourth Corner Credit Union v. Fed. Reserve Bank Kan. City,

861 F.3d 1052 (10th Cir. 2017) ....................................................................................... passim

Fox News Network, LLC v. Bd. Governors Fed. Reserve Sys.,

601 F.3d 158 (2d Cir. 2010).................................................................................................... 20

Greater Buffalo Press, Inc. v. Fed. Reserve Bank of N.Y.,

866 F.2d 38 (2d Cir. 1989)...................................................................................................... 15

Groome Res. Ltd., L.L.C. v. Parish of Jefferson,

234 F.3d 192 (5th Cir. 2000) .................................................................................................. 21

In re Idaho Conservation League,

811 F.3d 502 (D.C. Cir. 2016) ................................................................................................ 23

Jet Courier Servs., Inc. v. Fed. Reserve Bank of Atl.,

713 F.2d 1221 (6th Cir. 1983) ........................................................................................ 15 n.22

Lewis v. United States,

680 F.2d 1239 (9th Cir.1982) ................................................................................................. 20

Lopez v. Davis,

531 U.S. 230 (2001) ................................................................................................................ 15

Nat’l Org. for Marriage, Inc. v. Walsh,

714 F.3d 682 (2d Cir. 2013).................................................................................................... 21

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RadLAX Gateway Hotel, LLC v. Amalgamated Bank,

566 U.S. 639 (2012) ................................................................................................................ 19

Sayles Hydro Assocs. v. Maughan,

985 F.2d 451 (9th Cir. 1993) ............................................................................................ 21, 22

Simmonds v. INS,

326 F.3d 351 (2d Cir. 2003).................................................................................................... 22

Steel Co. v. Citizens for a Better Env’t,

523 U.S. 83 (1998) .................................................................................................................. 22

Taboola, Inc. v. Ezoic Inc.,

17 Civ. 9909, 2019 WL 465003 (S.D.N.Y. Feb. 6, 2019) ...................................................... 13

United States ex rel. Holbrook v. Brink’s Co.,

336 F.Supp.3d 860 (S.D. Ohio 2018) ..................................................................................... 20

United States ex rel. Kraus v. Wells Fargo & Co.,

No. 11 Civ. 5457 (BMC), 2018 WL 2172662 (E.D.N.Y. May 10, 2018) .......................... 5, 20

Vullo v. OCC,

17 Civ. 3574 (NRB), 2017 WL 6512245 (S.D.N.Y. Dec. 12, 2017) ...................................... 13

Statutes

12 U.S.C. § 248a .................................................................................................................... passim

12 U.S.C. § 342 ..................................................................................................... 2, 17, 18, 25 n.33

12 U.S.C. § 461 ..................................................................................................................... 5 n.3, 6

12 U.S.C. § 632 ............................................................................................................................. 20

12 U.S.C. § 1813 ....................................................................................................................... 5 n.3

12 U.S.C. § 1815 ....................................................................................................................... 5 n.3

Rules

Fed. R. Civ. P. 12(b)(1)............................................................................................................. 1, 13

Fed. R. Civ. P. 12(b)(6)............................................................................................................. 1, 13

Regulations

12 C.F.R. § 204 ............................................................................................................................... 6

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Other Authorities

Bd. Governors Fed. Reserve Sys.,

ANPR, Regulation D: Reserve Requirements of Depository Institutions,

https://www.govinfo.gov/content/pkg/FR-2019-03-12/pdf/2019-04348.pdf ....... 12, 13, 21, 24

Bd. Governors Fed. Reserve Sys.,

Federal Reserve Statistical Release: Factors Affecting Reserve Balances (Mar. 21, 2019),

https://www.federalreserve.gov/releases/h41/current/. ..................................................... 8 n.11

Bd. Governors Fed. Reserve Sys.,

Policies: The Federal Reserve in the Payments System (1990)

http://www.federalreserve.gov/paymentsystems/pfs_frpaysys.htm. .............................. 16 n.23

Cmts. on H.R. 1585 and Regulatory Streamlining: Hr’g Before Subcomm. on Fin. Insts. &

Consumer Credit of H. Comm. Banking & Fin. Servs. (May 12, 1999)

(statement of Laurence H. Meyer, Governor, Bd. Governors Fed. Reserve Sys.),

https://www.federalreserve.gov/boarddocs/testimony/1999/19990512.htm ...................... 7 n.5

Colo. Div. Banking, 107th Annual Report (2017),

http://www2.cde.state.co.us/artemis/regserials/reg21internet/reg212016internet.pdf.... 12 n.18

Editorial Bd., Narrow Odds for Narrow Banks, Wall St. J. (Sept. 12, 2018),

https://www.wsj.com/articles/narrow-odds-for-narrow-banks-1536793230 .................. 12 n.15

FDIC, Weekly National Rates and Rate Caps - Weekly Update (Mar. 25, 2019),

https://www.fdic.gov/regulations/resources/rates/. ........................................................... 8 n.10

Fed. Reserve Bank Cleveland, Who Is Holding All the Excess Reserves? (Aug. 11, 2015),

https://www.clevelandfed.org/newsroom-and-events/publications/economic-trends/2015-

economic-trends/et-20150811-who-is-holding-all-the-excess-reserves.aspx ........... 7 n.7, 8 n.9

Fed. Reserve Bank N.Y., Annual Report: 1980 (1981),

https://fraser.stlouisfed.org/files/docs/historical/frbny/1980_frb_newyork.pdf ... 6 n.4, 16 n.23

Fed. Reserve Bank St. Louis, Excess Reserves of Depository Institutions [EXCRESNS],

https://fred.stlouisfed.org/series/EXCSRESNS .................................................... 7 n.6, 24 n.29

Bd. of Governors of the Fed. Reserve Sys.,

Federal Reserve’s Key Policies for the Provision of Financial Services: About,

https://www.federalreserve.gov/paymentsystems/pfs_about.htm .................................. 16 n.24

H.R. Conf. Rep. No. 96-842 (1980) ...................................................................................... 19 n.27

H.R. Rep. No. 95-1590 (1978) .............................................................................................. 19 n.27

John H. Cochrane, Hoover Inst., Stanford Univ., Fed Nixes Narrow Bank (Sept. 5, 2018),

https://johnhcochrane.blogspot.com/2018/09/fed-nixes-narrow-bank.html ......... 1 n.1, 11 n.13

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John H. Cochrane, The Safest Bank the Fed Won’t Sanction, Chi. Booth Rev. (Nov. 30, 2018),

http://review.chicagobooth.edu/finance/2018/article/safest-bank-fed-won-t-sanction ... 11 n.13

Lalita Clozel, Fed Backs Marijuana-Focused Credit Union, Wall St. J. (Feb. 5, 2018),

https://www.wsj.com/articles/fed-backs-marijuana-focused-credit-union-1517870188 .... 2 n.2

Michael S. Derby, Bank Sues New York Fed Over Lack of Account, Wall St. J. (Sept. 5, 2018),

https://www.wsj.com/articles/bank-sues-new-york-fed-over-lack-of-account-1536185523 .....

......................................................................................................................................... 12 n.14

Nat’l Savings & Invs., https://www.nsandi.com/why-save-with-us ....................... 12 n.16, 24 n.32

Paul H. Kupiec, The Fed Refuses to Do Business with the Safest Bank on Earth—and Depositors

Pay the Price, Am. Enter. Inst. (Nov. 28, 2018),

http://www.aei.org/publication/the-fed-refuses-to-do-business-with-the-safest-bank-on-earth-

and-depositors-pay-the-price/ ......................................................................................... 12 n.15

Peter Conti-Brown, The Fed Wants to Veto State Banking Authorities. But Is that Legal?,

Brookings Inst. (Nov. 14, 2018),

https://www.brookings.edu/research/the-fed-wants-to-veto-state-banking-authorities-but-is-

that-legal/ .......................................................................................................... 12 n.15, 20 n.28

Press Release, Bd. Governors Fed. Reserve Sys., Federal Reserve Board Announces Reserve

Bank Income and Expense Data and Transfers to the Treasury for 2018 (Jan. 10, 2019),

https://www.federalreserve.gov/newsevents/pressreleases/other20190110a.htm .............. 8 n.8

Reserve Trust Company, https://www.reservetrust.com/ ....................................... 12 n.17, 24 n.30

Rodney Johnson, The Fed’s Newest Double Standard, Econ. & Mkts. (Sept. 26, 2018),

https://economyandmarkets.com/economy/central-banks/the-feds-newest-double-standard/ ...

......................................................................................................................................... 12 n.15

Safe Deposit Bank Nor., https://www.sdbn.com/ ................................................... 12 n.16, 24 n.32

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Plaintiff TNB USA Inc. (“TNB”) respectfully submits this memorandum of law in

opposition to defendant Federal Reserve Bank of New York’s (“FRBNY”) motion to dismiss

under Rules 12(b)(1) and (6) of the Federal Rules of Civil Procedure (ECF No. 20).

INTRODUCTION

According to its motion, FRBNY answers to no one—not TNB, not Connecticut, not

Congress, and not this Court. As a chartered state bank, TNB has a federal statutory right to

open a master account with FRBNY. For well over a year, however, FRBNY has kept up the

pretense that TNB’s application for a master account is “under review,” “slow walk[ing]” TNB

to “regulatory death,”1 while behind the scenes FRBNY, at the unlawful direction of the Federal

Reserve Board (the “Board”), has plainly decided it does not want TNB to operate. As a result,

TNB has and continues to suffer harm, which only this Court has the power to stop.

A master account is the gateway to Federal Reserve Bank payment services, which are

the backbone of the national banking system. Without access to one, a bank cannot function.

Until very recently, no bank had ever been forced to litigate its right to open one of these

accounts. Then, in 2017, the Tenth Circuit took up the same question at issue here: must the

Federal Reserve Banks open a master account for any qualified applicant? See Fourth Corner

Credit Union v. Fed. Reserve Bank Kan. City, 861 F.3d 1052. The plaintiff there, Fourth Corner,

was a state-chartered credit union that would provide financial services to marijuana-related

businesses, in probable violation of federal drug laws. The Federal Reserve Bank of Kansas City

(“FRBKC”) had denied Fourth Corner’s master account application on policy grounds and made

virtually the same arguments as FRBNY does here. Though the judges on the panel diverged in

1 John H. Cochrane, Hoover Inst., Stanford Univ., Fed Nixes Narrow Bank (Sept. 5, 2018),

https://johnhcochrane.blogspot.com/2018/09/fed-nixes-narrow-bank.html

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their reasoning, not one accepted those arguments, while Judge Bacharach dismantled each in

detail. After that decision, FRBKC agreed to open a master account for Fourth Corner.2

There is good reason for that. First, Section 11A of the Federal Reserve Act (“FRA”), as

amended by the Depository Institutions Deregulation and Monetary Control Act of 1980 (the

“Deregulation Act” or the “Act”), 12 U.S.C. § 248a, commands FRBNY to make services

available on an equal, non-discriminatory basis to all depository institutions. The Act was

intended to level the field between the larger member banks that until then had monopolized

Federal Reserve Bank services, charging others for access to services they received free of

charge, and the primarily smaller state-chartered non-member institutions that, forced to pay for

access, were at a significant competitive disadvantage. A master account is a prerequisite to all

Federal Reserve Bank services. Without equal access to master accounts, there can be no equal

access to services—like the right to play tennis without the right to a racket.

For almost forty years, FRBNY and the Board consistently interpreted Section 11A as a

mandate of equal access to services for all depository institutions. Then, in Fourth Corner, the

Board concocted the argument that FRBNY makes here: Section 11A imposes no duties at all,

and Section 13 of the FRA, 12 U.S.C. § 342, gives Federal Reserve Banks the discretion to

refuse deposits from any financial institution. Section 13, however, gave Federal Reserve Banks

discretion only with respect to the types of deposits to accept; not the right to decline all deposits

from a qualified state bank. Congress decided that chartered state banks like TNB should be able

to open a master account and operate in the national financial system, and it is not for FRBNY or

the Board to gainsay that decision.

2 Lalita Clozel, Fed Backs Marijuana-Focused Credit Union, Wall St. J. (Feb. 5, 2018),

https://www.wsj.com/articles/fed-backs-marijuana-focused-credit-union-1517870188.

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FRBNY’s argument, in the end, is that the Federal Reserve can nullify federal statutes—

an extreme and untenable position. And FRBNY knows that; it was prepared to fulfill its duty to

open a master account for TNB until the Board intervened and imposed the standstill that led to

this litigation. That intervention was unlawful: Congress did not give the Board authority to

direct the daily operations of the Federal Reserve Banks, and discovery will surely reveal that the

Board and FRBNY have improperly colluded in violation of their legal duties.

Second, unable to rebut TNB’s statutory interpretation, FRBNY resorts to technical

arguments: standing and ripeness. Because it has not formally denied TNB’s application after

more than eighteen months, FRBNY argues there is no harm to TNB and the Court should give

FRBNY more time to decide. This is an obvious ruse. Consistent with the statutory scheme,

master accounts are typically granted in mere days. Meanwhile, there is no sign that TNB’s

application is “under review,” and the Board has begun an agency rulemaking process

specifically to shut down TNB’s business even if its application is granted. All the while, TNB,

unable to function, has suffered considerable and ongoing harm. Not surprisingly, courts have

flatly rejected challenges to standing and ripeness in similar circumstances.

Finally, though irrelevant to TNB’s statutory rights, the Board’s and FRBNY’s policy

concerns are obviously overblown. “TNB” stands for “the narrow bank.” Its sole business will

be to take deposits from financially secure institutions, place the funds in a master account at

FRBNY to earn interest at the Interest on Excess Reserves (“IOER”) rate available only to banks,

and take a small spread for that service. TNB’s excess reserves will be a modest fraction of the

$1.5 trillion in excess reserves currently parked at the Federal Reserve Banks—mostly by large

commercial and foreign banks, who have pocketed almost all the IOER payments issued by the

Federal Reserve Banks (which came to approximately $38.5 billion in 2018 alone). TNB’s

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business, at the margins at least, will push against that trend, with potential benefits for ordinary

savers who have not benefited from recent rate increases.

FRBNY’s attempts to make TNB out as a greedy arbitrageur for “special interests” are

ironic, then, because the practical implication of FRBNY’s position is that too-big-to-fail banks

should make billions off the IOER program without passing on any earnings to customers, while

TNB should be barred from making far less while passing on far more—the very kind of

outcome the Deregulation Act was meant to prevent. Recognizing this, FRBNY stoops lower,

resorting to baseless innuendo that TNB poses a “danger” akin to “facilitating illegal activity.”

This is absurd. TNB underwent an intensive diligence review by the Connecticut Department of

Banking (“CTDoB”)—which is how TNB was chartered in the first place—and still more

diligence by FRBNY itself. None of these reviews revealed any such risks. FRBNY is not a

chartering authority and should not try to make itself one by flouting the law.

There is no looming policy disaster here; narrow banks operate in other countries without

incident, and indeed FRBNY has two virtually identical operations of its own. FRBNY’s

position is especially arbitrary because FRBKC has already granted a master account to another

state-chartered financial company with a business model very similar to TNB’s. Congress has

made clear that the Board may not implement its policy preferences by arbitrarily singling out

individual state banks for exclusion from the national payments system, and this Court should

enforce that restriction.

The motion should be denied.

BACKGROUND

A. The Federal Reserve System

FRBNY is one of twelve Federal Reserve Banks that, with the Board, form the nation’s

central bank. FRBNY is a corporate instrumentality of the United States with its own board of

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directors. The Board is a federal agency that “provides broad, general policy supervision” of the

Federal Reserve Banks. United States ex rel. Kraus v. Wells Fargo & Co., No. 11 Civ. 5457

(BMC), 2018 WL 2172662, at *6 (E.D.N.Y. May 10, 2018). The FRA defines the duties and

powers of the Board and the Federal Reserve Banks. 12 U.S.C. §§ 221 et seq.

B. Depository Institutions Deregulation and Monetary Control Act of 1980

The Federal Reserve payments system is a collection of services provided by the Federal

Reserve Banks that are “indispensable for all financial institutions.” Fourth Corner, 861 F.3d at

1064 (Bacharach, J.). These include the ability to clear checks and make wire transfers, currency

and coin services, and others. See 12 U.S.C. § 248a(b). Without those services, a “depository

institution is nothing more than a vault.” Fourth Corner, 861 F.3d at 1053 (Moritz, J.).

Before 1980, the payments system was unequal. Larger banks who were Federal Reserve

members exercised exclusive access. (Complaint (Aug. 31, 2018) (“Compl.”) ¶ 20 & n.2, ECF

No. 1.) These banks charged non-member banks under private pricing regimes—often at a

significant markup—for services that members received for free. (Id. ¶ 21.) Smaller, state-

chartered financial institutions like the emerging thrift industry—savings and loans, mutual

savings banks, and credit unions—were at a great competitive disadvantage. (Id. ¶ 22.)

In the late 1970s, the United States Department of Justice challenged this regime with a

pair of successful antitrust suits. (Id. ¶¶ 23–24.) Those victories created a right of access to

Federal Reserve Bank services for the thrift industry and led Congress to act. (Id. ¶¶ 24–25.)

The result, in 1980, was the Deregulation Act, which created a right of access to Federal

Reserve services for all qualified “depository institutions,” including all state-chartered banks, by

adding Section 11A to the FRA.3 (Id. ¶ 25.) The Act required transparency: the Board had to

3 See 12 U.S.C. §§ 461(b)(1)(A)(i), 461(b)(1)(B), 1813(a), 1815(a)(1).

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“publish . . . pricing principles” and “put into effect a schedule of fees . . . based on those

principles.” 12 U.S.C. § 248a(a). The fee schedule had to cover existing services and “any new

services which the Federal Reserve System offers.” Id. § 248a(b). Critically, the Act also

required equal treatment: one “pricing principle” commands that “[a]ll Federal Reserve bank

services covered by the fee schedule shall be available to nonmember depository institutions.”

Id. § 248a(c)(2) (emphasis added). In its annual report that same year, FRBNY wrote that the

Act “will have a significant effect on this and other Reserve Banks’ services. . . . Beginning in

1981, these services will be available equally to all depository institutions . . . .”4

C. The IOER Program

In 2008, Congress began allowing Federal Reserve Banks to pay IOER, at a rate set by

the Board. (Compl. ¶ 88.) The IOER rate is one of many policy tools the Board may use to

carry out one aspect of monetary policy: influencing the “federal funds rate.” (Id. ¶¶ 82–92.)

The Board requires depository institutions to maintain minimum levels of “required

reserves” in their master accounts against certain liabilities; however, depository institutions may

deposit additional reserves (“excess reserves”). See 12 U.S.C. § 461(b)(2); 12 C.F.R. § 204. The

federal funds rate is the interest rate at which banks lend excess reserves to each other overnight,

which is a benchmark for many other private-market interest rates. (Compl. ¶ 83.)

The Board does not control the federal funds rate directly. Rather, the Federal Open

Market Committee (“FOMC”)—majority-controlled by the Board—sets a target range, and the

Board uses policy tools to try to bring the effective federal funds rate prevailing in the market in

line with the FOMC’s target. (Id. ¶¶ 84, 87.) One of those tools is the IOER rate: raising or

4 Fed. Reserve Bank N.Y., Annual Report: 1980, at 35 (1981) (emphasis added), available at

https://fraser.stlouisfed.org/files/docs/historical/frbny/1980_frb_newyork.pdf.

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lowering the IOER rate can make it more (or less) attractive to hold excess reserves, leading

banks to charge more (or less) to lend those reserves to other banks. (Id. ¶¶ 88–91.)

In public testimony before Congress advocating for the IOER program and an end to the

prohibition on paying interest on corporate checking accounts, the Board said that, together,

these measures would increase competition and benefit depositors. For example, Laurence H.

Meyer, then a member of the Board, predicted that the “higher costs to banks will be partially

offset by interest on reserve balances, and over time, these measures should help the banking

sector attract liquid funds in competition with nonbank institutions and direct market investments

. . . . Small banks in particular should be able to bid for business demand deposits on a more

level playing field . . . .” He also predicted that “benefits . . . will likely be distributed rather

widely among bank customers,” with small businesses the “biggest winners.”5

Governor Meyer was trying, in part, to assuage the concern that the IOER program would

be a giveaway to large banks. His predictions have not proved true. In the decade since the

IOER program began, banks have deposited trillions of dollars in excess reserves—around $1.5

trillion in February 2019.6 “The largest banks . . . hold the greatest share of excess reserves, and

this share has grown substantially over time,” while foreign banks are also a “large contributor.”7

5 Cmts. on H.R. 1585 and Regulatory Streamlining: Hr’g Before Subcomm. on Fin. Insts. &

Consumer Credit of H. Comm. Banking & Fin. Servs. (May 12, 1999) (statement of Laurence H.

Meyer, Governor, Bd. Governors Fed. Reserve Sys.), available at

https://www.federalreserve.gov/boarddocs/testimony/1999/19990512.htm.

6 Fed. Reserve Bank St. Louis, Excess Reserves of Depository Institutions [EXCRESNS],

https://fred.stlouisfed.org/series/EXCSRESNS (last accessed Mar. 25, 2019).

7 Fed. Reserve Bank Cleveland, Who Is Holding All the Excess Reserves? (Aug. 11, 2015),

https://www.clevelandfed.org/newsroom-and-events/publications/economic-trends/2015-

economic-trends/et-20150811-who-is-holding-all-the-excess-reserves.aspx.

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The Federal Reserve Banks have paid billions of dollars in IOER: as much as $38.5

billion in 2018 alone.8 Most of that money has “concentrated on the balance sheets of the largest

banks.”9 (See also Compl. ¶¶ 95–97 & nn.17–18.) While excess reserves now earn 240 basis

points (2.4%), “jumbo” deposits—more than $100,000—now earn as little as ten basis points

(0.10%) from savings accounts, and six basis points (0.06%) from checking accounts.10

D. FRBNY’s Existing Narrow Banking Operations

Two other mechanisms available to the Federal Reserve system to influence the federal

funds rate are the Overnight Reverse Repurchase Agreement Facility (“ON RRP”) and Foreign

Repo Pool (“FRP”). (Id. ¶ 102.) Each serves an economic function very similar to TNB’s,

providing an overnight investment backed directly (or indirectly) by central bank liabilities that

passes on relatively high interest rates to a wider circle of participants than those eligible for

IOER, such as money market funds (ON RRP) and foreign central banks (FRP). (See id. ¶¶ 102–

19.) Each program has attracted billions of dollars in investments; in March 2019, for example,

foreign banks parked as much as $245 billion with the FRP program.11

E. TNB’s Charter and Master Account Application

TNB was founded in 2016 by experienced financial professionals and economists. (Id.

¶¶ 38–42.) Its business plan is to provide ultra-safe depository services for institutional money

8 Press Release, Bd. Governors Fed. Reserve Sys., Federal Reserve Board Announces Reserve

Bank Income and Expense Data and Transfers to the Treasury for 2018 (Jan. 10, 2019),

https://www.federalreserve.gov/newsevents/pressreleases/other20190110a.htm.

9 Fed. Reserve Bank Cleveland, Who Is Holding All the Excess Reserves? (Aug. 11, 2015),

https://www.clevelandfed.org/newsroom-and-events/publications/economic-trends/2015-

economic-trends/et-20150811-who-is-holding-all-the-excess-reserves.aspx.

10 FDIC, Weekly National Rates and Rate Caps - Weekly Update (Mar. 25, 2019),

https://www.fdic.gov/regulations/resources/rates/.

11 Bd. Governors Fed. Reserve Sys., Federal Reserve Statistical Release: Factors Affecting

Reserve Balances (Mar. 21, 2019), https://www.federalreserve.gov/releases/h41/current/.

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market investors by holding all assets with FRBNY, earning interest at the IOER rate, and

paying interest to customers at a slightly lower rate, thereby earning a small spread. (Id. ¶¶ 43–

44.) In this way, TNB hopes to give customers higher rates of interest than are currently

available in the market and exert competitive pressure on existing banks to raise their deposit

rates. (Id. ¶¶ 44–45, 98–100.) TNB’s excess reserves will be modest compared to the more than

a trillion dollars of excess reserves currently on deposit. (See id. ¶¶ 82, 98, 114.)

In July 2016, TNB began the process to obtain a charter from CTDoB so that TNB could

qualify for a master account. (Id. ¶ 48.) This led to a rigorous year-long diligence review of

TNB’s business plan, after which TNB received a temporary Certificate of Authority (“CoA”)

from CTDoB. (Id. ¶¶ 49–50.) Before issuing a final CoA, CTDoB asked for evidence that

FRBNY would open a master account for TNB. (Id. ¶ 52.)

In August 2017, TNB began the typically routine process of opening a master account

with FRBNY. (Id. ¶¶ 58–59.) The “application” is a single-page form agreement, asking only

for basic information about the applicant. (Id. ¶¶ 53–54.) The form states that processing “may

take 5-7 business days.” (Id. ¶ 54.) To complete the form, however, TNB needed an American

Bankers Association routing number issued by a company called Accuity. (Id. ¶ 55.)

TNB applied for a routing number in August 2017. (Id. ¶ 58.) The only requirements

were that TNB have a valid state or federal charter and be eligible to maintain an account at a

Federal Reserve Bank. (Id. ¶ 56.) Accuity forwarded TNB’s routing number request to FRBNY

for verification that TNB would be eligible for a master account. (Id. ¶ 59.)

FRBNY told Accuity that TNB would be eligible for a master account after the issuance

of a final CoA from CTDoB and maintenance of $500,000 in deposits. (Id. ¶¶ 60–62.) On that

basis, Accuity issued a routing number to TNB in October 2017. (Id. ¶ 62.)

- 10 -

TNB was now ready to submit a master account application but was told by an FRBNY

attorney that FRBNY wanted to conduct diligence of its own before proceeding because TNB

would not be insured and regulated by the FDIC. (Id. ¶ 63.) The attorney advised TNB not to

make a formal application until after FRBNY’s diligence review. (Id.)

FRBNY requested documents and information from TNB in September 2017 and made

more requests over the next few months. (Id. ¶¶ 65–68.) The requests focused on operational

issues already examined by CTDoD, such as creditworthiness and anti-money laundering

protections. (Id. ¶ 66.) TNB gave prompt, comprehensive responses. (Id. ¶¶ 65–66.)

F. The Board’s Decision to Interfere in TNB’s Master Account Application

In November 2017, FRBNY completed its review and told TNB that FRBNY was

prepared to inform CTDoB that TNB could open a master account once it received a final CoA

and maintained at least $500,000 in non-trust deposits. (Id. ¶ 68.) At the same time, FRBNY

said that the Board had learned of TNB’s intentions and wanted time to consider the policy

implications of TNB’s business model. (Id. ¶ 69.)

In early December 2017, FRBNY informed TNB that the Board was also prepared to

approve TNB’s master account—only to call back later the same day to say that TNB should not

expect approval any time soon. (Id. ¶ 70.) In February 2018, FRBNY told TNB that the Board

had “policy concerns” and likely would not allow TNB to open a master account. (Id. ¶ 72.)

Though TNB need not have done so, given its statutory rights, it made many efforts to

explain to the Board and FRBNY why any concerns were unfounded, including in-person

meetings with the Board and FRBNY and a formal written submission. (Id. ¶¶ 72–77.) By April

2018, TNB suspected that FRBNY and the Board knew they had no legal basis to deny TNB’s

application and were trying to delay until TNB gave up. (Id. ¶ 76.)

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In late April 2018, TNB formally applied for a master account and wrote to FRBNY’s

general counsel asking that FRBNY comply with its statutory obligations at once and commit to

opening TNB’s master account. (Id. ¶¶ 76–78.) In May 2018, FRBNY’s general counsel replied

that FRBNY would not do so because “senior policy officials at the Board . . . have expressed

the strong view that the New York Fed should not approve TNB’s request . . . .”12

G. The Board Begins a Rulemaking Process to Shut Down TNB While TNB’s

Master Account Supposedly Remains “Under Consideration”

After another three months without action, in August 2018, TNB filed this lawsuit.

Seven more months have now passed. Neither FRBNY nor the Board has asked for more

information, or given any status updates, regarding TNB’s application. FRBNY continues to

insist to the Court, however, that the application is “still under review.” (Letter (Oct. 16, 2018)

(“10/16/18 Letter”) at 1, ECF No. 14; see also Mem. Law Supp. FRBNY Mot. Dismiss (Mar. 8,

2019) (“Br.”) at 1–2, 9, 11–13, ECF No. 21.) There is no evidence that such a “review” exists,

but much else has happened in the meantime.

This lawsuit generated much public commentary—almost all sympathetic to TNB.

TNB’s business model is “an obvious boon to financial stability and efficiency,” concludes one

prominent commentator.13 A former top Federal Reserve staffer and current Dartmouth

12 Letter from Michael Held, General Counsel, FRBNY, to Thomas E.L. Dewey, Dewey Pegno

& Kramarsky LLP (May 16, 2018).

13 John H. Cochrane, Hoover Inst., Stanford Univ., Fed Nixes Narrow Bank (Sept. 5, 2018),

https://johnhcochrane.blogspot.com/2018/09/fed-nixes-narrow-bank.html; see also John H.

Cochrane, The Safest Bank the Fed Won’t Sanction, Chi. Booth Rev. (Nov. 30, 2018),

http://review.chicagobooth.edu/finance/2018/article/safest-bank-fed-won-t-sanction.

- 12 -

economics professor believes the Board “should welcome banks like TNB.”14 The Board may

not be “alone” in its concerns (see Br. at 8 n.5), but most commentators support TNB.15

There is ample basis for that support. Narrow banks already operate abroad,16 and TNB

has become aware of another state-chartered financial institution, the Reserve Trust Company

(the “Reserve Trust”), which recently received a master account from FRBKC. Like TNB, the

Reserve Trust, which is neither FDIC-insured nor federally regulated, does not make loans or

otherwise leverage client funds.17 The Reserve Trust has been operating for more than two

years, while presumably earning IOER, without incident.18

Finally, just three days before FRBNY filed the motion, the Board issued advance notice

of proposed rulemaking (“ANPR”) regarding narrow banks.19 An ANPR is the first step in the

agency rulemaking process. The import of this one is not subtle: the Board intends to put TNB

14 Quoted in Michael S. Derby, Bank Sues New York Fed Over Lack of Account, Wall St. J.

(Sept. 5, 2018), https://www.wsj.com/articles/bank-sues-new-york-fed-over-lack-of-account-

1536185523.

15 See, e.g., Paul H. Kupiec, The Fed Refuses to Do Business with the Safest Bank on Earth—and

Depositors Pay the Price, Am. Enter. Inst. (Nov. 28, 2018), http://www.aei.org/publication/the-

fed-refuses-to-do-business-with-the-safest-bank-on-earth-and-depositors-pay-the-price/; Peter

Conti-Brown, The Fed Wants to Veto State Banking Authorities. But Is that Legal?, Brookings

Inst. (Nov. 14, 2018), https://www.brookings.edu/research/the-fed-wants-to-veto-state-banking-

authorities-but-is-that-legal/; Rodney Johnson, The Fed’s Newest Double Standard, Econ. &

Mkts. (Sept. 26, 2018), https://economyandmarkets.com/economy/central-banks/the-feds-

newest-double-standard/; Editorial Bd., Narrow Odds for Narrow Banks, Wall St. J. (Sept. 12,

2018), https://www.wsj.com/articles/narrow-odds-for-narrow-banks-1536793230.

16 Nat’l Savings & Invs., https://www.nsandi.com/why-save-with-us (last visited Mar. 25, 2019);

Safe Deposit Bank Nor., https://www.sdbn.com/ (last visited Mar. 25, 2019).

17 See Reserve Trust Company, https://www.reservetrust.com/ (last accessed Mar. 25, 2019).

18 Colo. Div. Banking, 107th Annual Report at 16 (2017), http://www2.cde.state.co.us/artemis/

regserials/reg21internet/reg212016internet.pdf.

19 See Bd. Governors Fed. Reserve Sys., ANPR, Regulation D: Reserve Requirements of

Depository Institutions, available at https://www.govinfo.gov/content/pkg/FR-2019-03-

12/pdf/2019-04348.pdf.

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out of business with a discriminatory regulation even if TNB is successful here. The ANPR is

rife with loaded characterizations of the potential effects of TNB’s business model—though it

acknowledges the “potential benefits” found by many writers—and concludes by insinuating that

narrow banks like TNB should receive IOER at a rate of “zero.” This is not a fair-minded

solicitation of views, but an order of execution—and implicit recognition that FRBNY’s

supposed case for refusing to open a master account for TNB is a pretextual rearguard action.

LEGAL STANDARD

On either ground of FRBNY’s motion—Rule 12(b)(1) or 12(b)(6)—the Court must

accept the allegations in the complaint as true and draw all inferences in TNB’s favor. Vullo v.

OCC, 17 Civ. 3574 (NRB), 2017 WL 6512245, at *5 (S.D.N.Y. Dec. 12, 2017) (Fed. R. Civ. P.

12(b)(1)); Taboola, Inc. v. Ezoic Inc., 17 Civ. 9909, 2019 WL 465003, at *8 (S.D.N.Y. Feb. 6,

2019) (Fed. R. Civ. P. 12(b)(6)). For Rule 12(b)(1), a preponderance of the evidence, from the

pleadings or otherwise, must establish subject matter jurisdiction. Vullo, 2017 WL 6512245, at

*5. For Rule 12(b)(6), the facts in TNB’s complaint, including documents incorporated by

reference, need only make out a plausible claim. Taboola, 2019 WL 465003, at *8–9.

ARGUMENT

TNB has a more than plausible claim, and this Court has power to hear it. As a chartered

state bank, TNB has a statutory right to a master account—the gateway to critical services that

federal law requires FRBNY to make available to any qualified state bank. For going on two

years, at the unlawful direction of the Board, FRBNY has refused to open a master account for

TNB, offering only the slender excuse that TNB’s application—the review of which typically

takes mere days—is “under consideration.” Meanwhile, TNB is out of business; FRBNY has

effectively nullified all the resources that went into the intensive due diligence for TNB’s

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charter, while TNB continues to incur operating expenses. FRBNY’s refusal is especially

galling because the “policy” basis, though irrelevant, is demonstrably specious.

I. TNB HAS A STATUTORY RIGHT TO A MASTER ACCOUNT

Federal Reserve Banks once had the unbounded discretion that FRBNY claims here. The

result was a monopoly on services that enriched large incumbent banks at the expense of smaller

state-chartered financial institutions. So, almost forty years ago, Congress set definite limits on

that discretion by amending the FRA to mandate that Federal Reserve Banks make services

available equally to all qualified depository institutions. FRBNY’s position—that it may refuse

services to any qualified bank based on its or the Board’s policy preferences—violates a clear

Congressional command, disregards the Board’s and FRBNY’s consistent statements since 1980,

and subverts the statutory structure of the Federal Reserve system.

A. Section 11A of the Federal Reserve Act Unambiguously Requires FRBNY to

Open a Master Account for TNB

The only sensible reading of the FRA, as amended by the Deregulation Act, is that

FRBNY must make services, including master accounts, available to any depository institution,

including TNB.20 Judge Bacharach extensively considered the arguments FRBNY makes here

and rejected them—as this Court should, too. See Fourth Corner, 861 F.3d at 1067–74.

The terms of Section 11A are mandatory. The Board “shall publish . . . a set of pricing

principles . . . for Federal Reserve Bank services” and “a schedule of fees for such services . . .

based on those principles.” 12 U.S.C. § 248a(a) (emphasis added). Section 11A names the

“services which shall be covered by the schedule of fees,” which include “any new services

which the Federal Reserve System offers.” Id. § 248a(b) (emphasis added). “All Federal

20 FRBNY concedes for purposes of this motion that TNB is a qualified “depository institution”

under Section 11A. (Br. at 7 n.4.)

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Reserve bank services covered by the fee schedule shall be available to nonmember depository

institutions . . . .” Id. § 248a(c)(2) (emphasis added). Elsewhere, by contrast, Section 11A uses

“may” to confer discretion. See id. § 248a(e). “Congress’ use of the permissive ‘may’ contrasts

with . . . use of a mandatory ‘shall’ in the very same section . . . to impose discretionless

obligations.” Lopez v. Davis, 531 U.S. 230, 241 (2001). One of those obligations is that Federal

Reserve Banks21 make services available to all “nonmember depository institutions.”

It is irrelevant that “all” does not actually appear in the operative phrase because there is

no restriction on the depository institutions to whom services shall be available. The only logical

reading is that FRBNY’s obligations extend to each and every one. See Fourth Corner, 861 F.3d

at 1069–70 (Bacharach, J.) (collecting authorities); see also Greater Buffalo Press, Inc. v. Fed.

Reserve Bank of N.Y., 866 F.2d 38, 40 (2d Cir. 1989) (“check clearing services . . . to be made

available to all banks”) (emphasis added); Jet Courier Servs., Inc. v. Fed. Reserve Bank of Atl.,

713 F.2d 1221, 1223 (6th Cir. 1983) (same).22 FRBNY does not (and cannot) explain—other

than invoking unanswerable discretion to interpret the Act as it sees fit—how the phrasing of

Section 11A puts any limitation on the depository institutions who are entitled to services.

Unsurprisingly then, until very recently, FRBNY and the Board both interpreted Section

11A as a mandate to make Federal Reserve Bank services equally available to “all” qualified

institutions. The year Congress passed the Act, FRBNY wrote that “services will be available

21 FRBNY’s insistence that Section 11A has no bearing on the obligations of the Federal Reserve

Banks because its title is “directed to the powers and duties of the ‘Board’” (Br. at 18) ignores

that Section 11A explicitly refers to “Federal Reserve bank services,” 12 U.S.C. § 248a(c)(2)

(emphasis added). “A statute’s caption . . . cannot undo or limit its text’s plain meaning.” Intel

Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241, 262 (2004).

22 FRBNY tries to distinguish Greater Buffalo and Jet Courier but does not acknowledge that

both held squarely that the Deregulation Act expanded Federal Reserve Bank services to “all”

depository institutions. (See Br. at 22 n.8.)

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equally to all depository institutions.”23 Even today, the Board says on its website that the Act

gives “all depository institutions access to the Federal Reserve’s payment services.”24 Thus,

TNB’s reading is not the idiosyncratic interpretation of a single Tenth Circuit judge—as FRBNY

would have the Court believe (Br. at 21–22)—but the Board’s and FRBNY’s own consistent

understanding for almost forty years. The only mention of these past interpretations in

FRBNY’s brief is deeply misleading. (See id. at 22–23.) The Board and FRBNY did not

“simply note[ ] that the [Deregulation Act] made Federal Reserve Bank services available to

nonmember depository institutions as well as member depository institutions” (contra id.), but

explicitly said, without limitation, the precise opposite of FRBNY’s litigation position.

A master account is undoubtedly one of the services that FRBNY must make available.

Simply put, “all services offered by the Federal Reserve System”—not merely “some” (contra

Br. at 19)—“are conditioned on the issuance of master accounts,” Fourth Corner, 861 F.3d at

1068–69 (Bacharach, J.); accord id. at 1053 (Moritz, J.). To argue that a master account is not

subject to the Act’s mandate of equal access, as FRBNY does, is specious; like conceding the

right to drive but denying the right to access the roads. That interpretation is illogical and “flies

in the face of Congress’s unambiguous command.” Id. at 1069 (Bacharach, J.).

FRBNY’s attempts to discredit Judge Bacharach’s persuasive interpretation of Section

11A all fail. (See Br. at 22–23.) First, no court has yet followed Judge Bacharach’s reasoning

23 Fed. Reserve Bank N.Y., Annual Report: 1980, at 35 (1981) (emphasis added), available at

https://fraser.stlouisfed.org/files/docs/historical/frbny/1980_frb_newyork.pdf; accord Bd.

Governors Fed. Reserve Sys., Policies: The Federal Reserve in the Payments System (1990)

(“Federal Reserve payment services are available to all depository institutions.”) (emphasis

added), available at http://www.federalreserve.gov/paymentsystems/pfs_frpaysys.htm.

24 Bd. of Governors of the Fed. Reserve Sys., Federal Reserve’s Key Policies for the Provision of

Financial Services: About, https://www.federalreserve.gov/paymentsystems/pfs_about.htm (last

updated Oct. 28, 2016) (emphasis added).

- 17 -

because—in a revealing historical detail—until Fourth Corner, in the near-forty-year history of

the Deregulation Act, no qualified institution had ever had to litigate its right to a master account.

Second, though Judge Bacharach wrote for himself, no other judge on the panel disagreed with

his reading, and the district judge had necessarily reached the same conclusion.25 See Fourth

Corner Credit Union v. Fed. Reserve Bank Kan. City, 154 F. Supp. 3d 1185, 1188–89 (D. Colo.

2016). Third, for all the reasons above, Judge Bacharach did not ignore the purported “absence”

of “all” from the statutory text or “misconstrue[ ]” the Board’s and FRBNY’s past

pronouncements. (Contra Br. at 22–23.) Judge Bacharach addressed each issue at length, see

Fourth Corner, 861 F.3d at 1069–72, and it is telling that FRBNY, almost two years later, does

little more than repeat the same arguments that Judge Bacharach rejected, without addressing his

rebuttals in any real detail.26

B. Section 13 of the Federal Reserve Act Does Not Permit Federal Reserve Banks to

Withhold Master Accounts or Other Services

FRBNY argues that Section 13 of the FRA, which describes the types of deposits that

Federal Reserve Banks may receive, should override the clear mandate of Section 11A, which

specifically says which services “shall be available” and to whom. Judge Bacharach considered

this contention, too, and correctly rejected it. See id. at 1067–74.

25 Notably, Judge Moritz agreed with Judge Bacharach’s conclusion that a master account is

necessary to access all Federal Reserve Bank services. Fourth Corner, 861 F.3d at 1053.

26 FRBNY argues, for example, that Judge Bacharach “ignore[d]” that “the terms of master

accounts have always made clear that master account agreements are ‘subject to approval’ by

Federal Reserve Banks and may be terminated . . . ‘at any time.’” (Br. at 23.) Even leaving

aside that agency boilerplate cannot override the express will of Congress, the mere fact that

FRBNY might, for unspecified reasons, reject a master account application or terminate a master

account does not conflict with Section 11A’s mandate. For example, FRBNY might refuse to

open an account after finding that the applicant was not in fact a qualified depository institution.

- 18 -

Section 13 provides that “[a]ny Federal reserve bank may receive from any of its member

banks, or other depository institutions and from the United States, deposits of current funds in

lawful money, national-bank notes, Federal reserve notes, or checks, and drafts, payable upon

presentation or other items, and also, for collection, maturing notes and bills.” 12 U.S.C. § 342

(emphasis added). As Judge Bacharach recognized, Section 13 does no more than list “the types

of monetary instruments that Federal Reserve Banks may receive for deposit,” and not “which

institutions can access Federal Reserve services”—a subject “governed instead by § 248a(c)(2),

which establishes open access to Federal Reserve services for all nonmember depository

institutions.” Fourth Corner, 861 F.3d at 1074 (emphasis added).

Unable to discredit that interpretation, FRBNY reaches back to the 1920s, relying heavily

on Farmers’ & Merchants’ Bank of Monroe, N.C. v. Federal Reserve Bank of Richmond, 262

U.S. 649 (1923). (See Br. at 15, 21, 24.) This case predates the Deregulation Act by almost

sixty years and in no way requires this Court to adopt FRBNY’s preferred construction of the

FRA. There, the Supreme Court merely concluded, like Judge Bacharach, that the language of

Section 13 was “permissive” with respect to the types of instruments Federal Reserve Banks may

receive. Id. at 662 (“neither section 13, nor any other provision of the [FRA], imposes . . . any

obligation to receive checks for collection”) (emphasis added). The decision is silent about a

Federal Reserve Bank’s discretion (or lack thereof) to take deposits from particular institutions—

a question settled by the Deregulation Act. Whatever the state of the law in 1923, Congress’s

later intention to expand access to Federal Reserve Bank services is explicit in Section 11A.

There is no conflict, then, between Sections 11A and 13. (Contra Br. at 20–21.) It can

be equally true that FRBNY has discretion to decide which types of deposits to receive and does

not have discretion to deny services, including a master account, to a qualified depository

- 19 -

institution. If, for example, FRBNY exercised its discretion under Section 13 to receive checks

for collection, then Section 11A would require only that FRBNY did so on a non-discriminatory

basis for all qualified depository institutions.27 (Contra Br. at 16–17.)

C. Section 11A’s Mandate Does Not Conflict with the FRA but the Board’s

Unlawful Intervention in FRBNY’s Daily Operations Does

There is also no inconsistency between Section 11A and the Federal Reserve’s “statutory

policy mandates.” (Contra Br. at 21–25.) Section 11A is one of those mandates; Connecticut

gave TNB the right to operate under a state charter, and TNB has the right to a master account.

FRBNY goes as far as arguing that, even if TNB is correct on the law, other “statutory

policy mandates” give FRBNY the right to ignore Section 11A’s mandate whenever FRBNY or

the Board sees fit. (Br. at 23.) That position is as extreme as it is incorrect. First, “it is a

commonplace of statutory construction that the specific governs the general.” RadLAX Gateway

Hotel, LLC v. Amalgamated Bank, 566 U.S. 639, 645 (2012) (quotation marks and citation

omitted). “However inclusive may be the general language of a statute, it will not be held to

apply to a matter specifically dealt with in another part of the same enactment.” Fourco Glass

Co. v. Transmirra Prods. Corp., 353 U.S. 222, 228–29 (1957) (quotation marks and citation

omitted). Second, “[t]he Fed is not a chartering authority and should not contort itself to become

one,” in the words of a prominent commentator. “The kinds of existential banking concerns that

27 The legislative history of the Deregulation Act, which FRBNY notably elides (see Br. at 20–

21), supports this conclusion, see, e.g., H.R. Rep. No. 95-1590, at 20 (1978) (“The [House

Committee on Banking Finance and Urban Affairs] believes that the wide access to Federal

Reserve services for nonmember banks authorized by this bill will insure [sic] that a basic level

of services is available to all banks throughout the country on a nondiscriminatory basis.”)

(emphasis added); H.R. Conf. Rep. No. 96-842, at 73 (1980) (“House amendment includes a

provision for the Federal Reserve to . . . open access to [Federal Reserve] services to all

depository institutions on the same terms and conditions as member banks.”) (emphasis added).

- 20 -

the Fed makes about Fourth Corner and TNB are for chartering authorities to evaluate.

Connecticut and Colorado have already done this work.”28

The Board, moreover, has no place in the master account process. “Congress did not

intend to give the federal government direction over the daily operation of the Reserve Banks.”

Fox News Network, LLC v. Bd. Governors Fed. Reserve Sys., 601 F.3d 158, 161 (2d Cir. 2010)

(internal quotation marks and citation omitted). “The Board only provides broad, general policy

supervision,” while the Federal Reserve Banks determine “the manner of conducting general

Bank business and appoint officers to implement and supervise daily [ ] activities,” like “holding

reserves for member banks.” Kraus, 2018 WL 2172662, at *6 (quotation marks and citations

omitted); accord Lewis v. United States, 680 F.2d 1239, 1241 (9th Cir.1982); United States ex

rel. Holbrook v. Brink’s Co., 336 F.Supp.3d 860, 869–70 (S.D. Ohio 2018).

FRBNY was willing to open TNB’s master account until the Board intervened. (Compl.

¶¶ 68–70.) The Board may not impose itself on FRBNY’s routine operations to implement

policy, and this case should proceed to discovery to determine whether the Board has done so.

II. THIS COURT HAS SUBJECT MATTER JURISIDICTION

FRBNY’s standing and ripeness arguments fail as well. This Court has original subject

matter jurisdiction to hear suits against FRBNY, 12 U.S.C. § 632, and it is well settled that

agencies may not avoid lawsuits by refusing to act on an application, as FRBNY has done here,

causing undoubtable harm to TNB with each passing day.

28 Peter Conti-Brown, The Fed Wants to Veto State Banking Authorities. But Is that Legal?,

Brookings Inst. (Nov. 14, 2018), https://www.brookings.edu/research/the-fed-wants-to-veto-

state-banking-authorities-but-is-that-legal/.

- 21 -

A. TNB’s Claims Are Ripe Because FRBNY Has Refused to Act on TNB’s

Application for a Master Account

FRBNY argues that TNB’s account request is not ripe because it is “still under

consideration.” (Br. at 11.) Not so. FRBNY has had more than eighteen months to decide—

when approval is mandatory and should have taken mere days. This is a classic case of denial by

delay, and courts routinely reject challenges to ripeness on similar facts.

After months of diligence, in December 2017, FRBNY told TNB that approval of its

master account was forthcoming; then the Board countermanded that decision. (Compl. ¶¶ 65–

70.) TNB met with the Board and made a written submission addressing its concerns. The

response in May 2018, as conveyed through FRBNY, was that it was the Board’s “strong view

that the New York Fed should not approve TNB’s request.” Since then, there has been no

noticeable action on TNB’s application. Instead, mere days before FRBNY filed the motion, the

Board issued an ANPR designed to eviscerate TNB’s business should it ever receive a master

account. Clearly, FRBNY has already decided to bend to the Board’s will and deny TNB’s

account—and has not formally done so only for the convenience of its litigation position.

A claim should be dismissed as constitutionally unripe only when it “depends upon

‘contingent future events that may not occur as anticipated, or indeed may not occur at all.’”

Nat’l Org. for Marriage, Inc. v. Walsh, 714 F.3d 682, 687 (2d Cir. 2013) (citation omitted). That

is not the case here. Federal courts routinely reject ripeness challenges where the defendant’s

“indeterminate delay has the same effect as an outright denial.” Groome Res. Ltd., L.L.C. v.

Parish of Jefferson, 234 F.3d 192, 198–200 (5th Cir. 2000) (defendant failed to either grant or

deny a permit application for 82 days past target date and plaintiff’s claim presented a purely

legal question); see also Sayles Hydro Assocs. v. Maughan, 985 F.2d 451, 453–454 (9th Cir.

1993); Amico v. New Castle Cty., 553 F. Supp. 738, 741–743 (D. Del. 1982) (same).

- 22 -

Nor does prudential ripeness give any basis for dismissal. (Contra Br. at 12–13.) Under

that doctrine, a court may dismiss a claim that, while constitutionally ripe, “will be better

decided later,” so long as “the parties will [not] be made worse off on account of the delay.”

Simmonds v. INS, 326 F.3d 351, 357 (2d Cir. 2003). There are two considerations: “(1) whether

an issue is fit for judicial decision and (2) whether and to what extent the parties will endure

hardship if decision is withheld.” Id. at 359 (citation omitted). Neither favors FRBNY.

First, under the fitness prong, no new facts will enhance the Court’s ability to resolve the

issue of statutory interpretation presented by TNB’s complaint. Either FRBNY has the legal

discretion to deny a master account on “policy” grounds or not. The supposedly “ongoing”

policy review—even if not a smokescreen—will yield no insight. See id. (issues are prudentially

ripe when they “would not benefit from any further factual development and . . . the court would

be in no better position to adjudicate the issues in the future than it is now”) (citation omitted).

Second, FRBNY’s unlawful decision to subject TNB to a never-ending “policy” review is

causing obvious hardship right now, which will only compound with further delay. FRBNY’s

plain intention is to hold off TNB long enough for the Board to ensure—though a rule-making

process TNB believes is contestable in its own right—that even if granted a master account TNB

will never have equal access to IOER. The case for hardship is indisputable. See Sayles, 985

F.2d at 454 (“The hardship is the process itself. Process costs money.”).

B. TNB Has Standing to Challenge FRBNY’s Ongoing Refusal to Open a

Master Account Because Each Passing Day Adds to Its Losses

FRBNY argues that TNB lacks standing because it has not alleged an “injury in fact” (Br.

at 10–11)—“a harm . . . that is concrete and actual or imminent, not conjectural or hypothetical,”

Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83, 102–03 (1998) (internal quotations and

citation omitted). But the concrete and actual harm here is clear: FRBNY has refused to honor

- 23 -

its statutory obligation and as a result TNB cannot operate its business. This is a quintessential

“case or controversy,” and this Court has the power to resolve it.

FRBNY’s notion that it can insulate itself from review and deny TNB recourse to the

judicial system simply by withholding a formal denial of TNB’s application is contrary to

controlling law. It is well-established that one party’s denial of another’s statutory right through

a failure to act is justiciable to the same degree as a party’s affirmative denial of a statutory

right. E.g., In re Idaho Conservation League, 811 F.3d 502, 507 (D.C. Cir. 2016) (standing to

challenge failure to promulgate required regulations where challenging party had suffered

continuing harm due to delay); Comm’n Full Emp’t v. Blumenthal, 606 F.2d 1062, 1064–65

(D.C. Cir. 1979) (standing to challenge ongoing inaction regarding civil rights complaints).

C. FRBNY Has Identified No Legal Authority or Sound Reason for the Court to

Refuse Jurisdiction Under the Declaratory Judgment Act

Finally, FRBNY’s throw-away argument that the Court should “decline jurisdiction” over

TNB’s claim for a declaratory judgment on “public interest” grounds must also be rejected. (Br.

at 13). FRBNY gives no relevant authority for this theory, and a far more compelling precedent

is at hand: Fourth Corner, in which the District of Colorado and the Tenth Circuit did not

decline such jurisdiction. This Court should take the same approach.

FRBNY does not even bother to apply the factors that should “guide the district court’s

exercise of discretion in Declaratory Judgment Act cases,” which are “(1) whether the judgment

will serve a useful purpose in clarifying or settling the legal issues involved; and (2) whether a

judgment would finalize the controversy and offer relief from uncertainty.” Dow Jones & Co.,

Inc. v. Harrods Ltd., 346 F.3d 357, 359 (2d Cir. 2003) (citation omitted). Thus, the Court’s

discretion hinges on whether a declaratory judgment will actually resolve this case—not whether

the court should defer to the vaguely drawn policy preferences of the defendant.

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FRBNY argues that the Court “should allow the ANPR process to run its natural course”

(Br. at 13–14), but this is simply another way of saying that the Court should allow FRBNY to

flout federal law until the Board can amend its regulations to put TNB out of business by other

means. When any such regulations are issued, TNB (and the courts) can address them. In the

meantime, FRBNY must follow the law.

III. THE BOARD’S POLICY CONCERNS ARE IRRELEVANT AND BASELESS

For all the reasons above, the Board’s “policy” concerns are no basis to deny TNB its

statutory right to a master account—but those concerns are also highly exaggerated.

The Federal Reserve Banks collectively hold more than $1.5 trillion in excess reserves—

most for large banks that on average pay paltry interest rates to their depositors.29 What those

large banks do with their billions in earnings from the IOER program apparently matters little to

the Board or FRBNY. Yet the mere possibility that TNB might increase the number of excess

reserves by a modest amount, while more broadly distributing earnings from IOER to depositors

at a smaller rate of profit than the large banks, has now led the Board and FRBNY to believe the

entire financial system is at stake. This is obviously hyperbole—especially because a financial

institution very similar to TNB already has a master account;30 FRBNY operates two similar

facilities of its own through ON RRP and FRP (Compl. ¶¶ 102–19);31 and narrow banks operate

elsewhere in the world without calamitous consequences.32

29 Fed. Reserve Bank St. Louis, Excess Reserves of Depository Institutions [EXCRESNS],

https://fred.stlouisfed.org/series/EXCSRESNS (last accessed Mar. 25, 2019).

30 Reserve Trust Company, https://www.reservetrust.com/ (last accessed Mar. 25, 2019).

31 FRBNY all but admitted as much in its letter request for a pre-motion conference. (See

10/16/18 Letter at 3 (citing, and not disputing, Compl. ¶¶ 109, 114, 116).)

32 Nat’l Savings & Invs., https://www.nsandi.com/why-save-with-us (last visited Mar. 25, 2019);

Safe Deposit Bank Nor., https://www.sdbn.com/ (last visited Mar. 25, 2019).

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FRBNY, recognizing this, frames the “threat” posed by TNB in highly speculative and

contingent terms: TNB’s business model has “the potential to complicate the implementation of

monetary policy”; banks like TNB “could potentially attract a large quantity of deposits and

maintain very large balances at Federal Reserve Banks.” (Br. at 8 (emphasis added).) Of course,

the Federal Reserve Banks already have a large quantity of excess reserves on hand, in no small

part because large banks have taken advantage of the lack of competition for deposits to capture

the vast majority of IOER earnings for themselves. The Board said those earnings would radiate

out to depositors, but that simply has not happened. (Id. ¶¶ 94–97 & n.16.) TNB will help

change that by putting a modicum of competitive pressure on large banks to raise interest rates

for deposits, improving the efficiency and fairness of IOER as a policy tool. (Id. ¶¶ 100–01.)

TNB will not “jeopardize” the public interest. (Br. at 24.) FRBNY’s efforts to associate

TNB with illegality, insolvency, or “special interests” are unfounded smears. (See id. at 17, 23–

24.) TNB’s business model is undoubtedly lawful and underwent months of intensive diligence

by CTDoB and FRBNY. (See Compl. ¶¶ 48–52, 63–68.) In Fourth Corner, the Tenth Circuit

considered the application of Section 11A to a credit union that would actually support illegal

activity. Even in those extreme circumstances—in no way comparable to TNB’s—not one judge

accepted FRBNY’s preferred interpretation of the FRA.33

CONCLUSION

For the all the reasons above, FRBNY’s motion should be denied.

33 Judge Moritz, the only Tenth Circuit judge to conclude that illegality was a basis for dismissal

of Fourth Corner’s complaint, did not base her decision on the language of Section 13, but rather

“[b]ecause the district court correctly declined to lend its equitable power to illegal activity.”

Fourth Corner, 861 F.3d at 1053 (emphasis added).

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Dated: New York, New York DEWEY PEGNO & KRAMARSKY LLP

March 26, 2019

___

Thomas E.L. Dewey

David S. Pegno

Anders W. Pauley

777 Third Avenue – 37th Floor

New York, New York 10017

Tel. (212) 943-9000

Fax (212) 943-4325

tdewey@dpklaw.com

dpegno@dpklaw.com

apauley@dpklaw.com

Attorneys for Plaintiff TNB USA Inc.